Saturday, May 25, 2019

Mutual Fund Distributors on the Verge of Death Series 2



How many times one IFA have to face rough words of his client? It was not a mistake being IFA, it sold the product and then the client suffered loss.  When IFA started the business he was told look into the Offer document to check the objective of investments. Now does IFA need to become a portfolio analyst before recommending any product? An IFA cannot get back to school to study now. Falling revenues and loosing clients have now become now inevitable.

The revenues have fallen and IFA’s are already in problem with the current mess created by the AMC. To whom I shall write or address to get a solution to my matter. The client wanted returns and we gave them products. But managing the products and generating a return from them is the work of the AMC and their professionals. Then why I should lose the client. What explanation should I give being an IFA for the fiasco in debt products? The current scenario will push these clients towards Bank FD  and will never attract Mutual Funds to them. 

If an IFA  go to AMFI then indirectly he will file the complaint to those who about AMC and the irony is that he will submit the complaint to the AMC Heads about themselves only. AMFI is run by the AMC people and by the IFA community.  Why does the AMFI need AMC people to represent to the government why can’t the AMFI be headed by the IFA community?

The financial market is under a critical phase.  Mutual funds are no longer Sahi hai. Last 1 year we all faced the burn of IL&FS, ZEE and then few NBFC stock problems. Long back we faced Amtek Auto problem and few more which I don’t remember.

The performance of FMP has also been impacted.  Credit Risk-based papers are best suited for well-defined products under the category. The strangest part is that Liquid Funds which should have a maturity of 90 days to 180 days in terms of papers being invested how they get into negative return phase. This is because those risk-based papers were held in those Liquid Fund product portfolios. The most surprising part is that same risk-based paper has been included in every category of Debt Mutual fund.  How can this be allowed? Why did not SEBI interfere into the portfolio being managed by the Debt Mutual fund category?

The debt fund is collapsing due to the inbuilt structure of products where the papers itself are no longer plain vanilla products.  When the unlisted firms in the Zee group which borrowed money, pledged the shares in listed group companies as collateral. When these companies defaulted happened, and some creditors sold the pledged shares, the share price crashed. So creditors could not recover the full value of their outstanding loans.

We all know that DSP, ICICI, Reliance and few more AMC brings a huge number of FMPs. Now in order to generate a return from these FMP ones needs debt papers and lack of papers brings the Fund management team to look for poorly rated papers under the Name of Risk-Based Debt paper.

The ZEE group story will occur with many more companies as on when their times come.  Debt Mutual Funds are on the tip of Iceberg. The Fund managers and AMC greed of beating the players within the circle and generating superior returns have created this mess.  

The biggest problem as on date is that the NBFC sector is reeling and hence many ancillary industries will suffer. This will impact the debt instruments floated by them as they have commitments to payback and this is where Debt Mutual Funds faces problems.

Well, we currently don’t know how much-leveraged debt holdings are there in the debt mutual fund space. But if any IFA loses any clients who will take the blame and who will compensate?

Coming back to the question where an IFA will complain.

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